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U.K. Mulls Binding Say-On-Pay Votes

Reese Darragh | January 25, 2012

Similar to say-on-pay votes in the United States, votes on executive compensation in Britain are advisory votes only, meaning that boards there are free to ignore them. But that could be changing in the near future.

Earlier this week, Vice Cable, U.K. business secretary, told Parliament that the Cameron administration was considering a proposal to make say-on-pay votes binding and to propose other measures to rein in compensation "excesses," including exit packages in excess of one year's salary.

"The evidence is clear that business and investors recognize there is a disconnect between top pay and company performance and that something must be done," Cable told lawmakers in the House of Commons. "We cannot accept top pay rising at five times average workers' pay as we did last year."

The British Government is also considering proposals that would increase disclosure on pay, such as a single figure for total pay, and create more diverse compensation committees on the boards of U.K. companies.

British shareholder groups largely welcomed the comments, although they urged caution on moving forward with binding shareholder pay votes. "[T]he introduction of a binding vote needs to be handled very carefully, and shareholders need to know more about what it means," NAPF Chief Executive Joanne Segars said in a statement today. "A vote must not impede the effective management of businesses, or the constructive dialogue between shareholders and boards."

Critics of the idea warn that enforcing a binding vote to reverse executive pay contracts could raise some thorny issues, such as the legal complications of voiding contractual arrangements with individual executives.

Some of the alternative approaches that have been suggested include:

  • Allow employee representatives to sit on compensation committees, as seen in other European counties
  • Force executives to receive more of their compensation in shares rather than cash

These ideas have not received the same level of endorsement by senior government officials and investor bodies. It is expected the publication of the consultation findings, as well as final recommendations, to the binding say-on-pay votes proposal is scheduled for the end of January.